Fannie Mae directed lenders in its December 1st up-date, to begin submitting rehabilitated/converted condominium projects to Fannie Mae for review prior to qualifying the loan.
When many buildings are converted into condos, major components are rarely replaced, which can lead to increased costs to the unit owners for maintenance and major repairs. Fannie Mae used to delegate the review of these conversion projects to the lender, but now requires the review to be done through its Project Eligibility Review Service.
Fannie said this will increase homeowner association reserve requirements to minimize future potential financial hardships for the unit owners, by making sure a project is sustainable for a longer period of time.
As part of the review, all projects are subject to an on-site inspection by Fannie Mae, as well as an independent company reserve study. Project budgets must account for the costs in the study and include a utility contingency of at least 10% of the previous year's utility costs.
Funds needed to cover the cost of items found in the reserve study or engineer's report, that need to be replaced within five years, must be deposited into the homeowner's association reserve account ahead of time.
Projects involved in litigation and any conversions from hotels or motels are not eligible for Fannie Mae financing.
Currently, this changes Fannie Mae’s procedures only, not those of Freddie Mac or FHA loans.
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